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Substantiation requirements relaxed for employer-provided cell phones

Employers across the country are dealing with innumerable challenges as a result of health reform and other legislation enacted this year. However, employers may find at least one bright spot -- in a new tax law addressing their provision of cell phones and similar telecommunications equipment to their employees. This issue has been a source of widespread frustration for several years, with industry groups criticizing the treatment as outdated and out of sync with the widespread use, and considerably reduced costs, of cell phone technology today.

By way of background, employer-provided fringe benefits are included in an employee’s taxable income as wages unless a specific exception applies. Working condition fringe benefits – property or services provided to an employee by the employer that would be deductible as “ordinary and necessary” business expenses if incurred by the employee – are excludable from an employee’s gross income if certain record-keeping requirements are satisfied under Code Section 274(d). Under prior law, business use of employerprovided cell phones was deductible to the employer and excludable from an employee’s income as a working condition fringe benefit only if the business use of the cell phones was substantiated under the particularly burdensome rules that applied to “listed property” described in Internal Revenue Code Section 280F. If these rules were not met, the value of all business use and personal use of an employer-provided cell phone was includable in an employee’s taxable wage income, and subject to FICA, Medicare tax, and income tax withholding.

The Small Business Jobs Act of 2010 (SBJA) now has removed cell phones from the definition of “listed property.” As a result, effective (retroactively) as of January 1, 2010, cell phones are not subject to the stricter substantiation requirements of Code Section 280F. Employees no longer are required to maintain detailed records of usage of employerprovided cell phones, thereby making it easier for employers to deduct, and employees to exclude, the cost of the business use of cell phones. Reasonable allocations and estimates of business use (excludable) and personal use (still taxable) now can be made.

The SBJA provisions do not put an end to the dialogue, however. According to the Joint Committee on Taxation’s report on the SBJA, the delisting of cell phones does not affect the IRS’s authority to determine the appropriate characterization of cell phones as a working condition fringe benefit or whether personal use of cell phones that are provided primarily for business purposes qualify as a de minimis fringe benefit (similar to occasional personal use of office copiers) – an outcome that would be considerably more advantageous to taxpayers. However, as of the date of this alert, the IRS has not made any pronouncements about the proper post-SBJA treatment of the personal use of employerprovided cell phones.

Employers may wish to review their cell phone policies and determine what changes should be made to avail themselves of the simplified substantiation requirements going forward. However, it may be advantageous for employers to wait a modest amount of time to see if the IRS will act upon the nudge included in the Joint Committee’s report by issuing further guidance on this topic.

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